I will continue to monitor the new selection I made using the same approach as last year, and see what happens with them. However I will no longer put my money in it given the failure to a) deliver on the promise so far and b) the individual stocks I selected myself have outperformed the market with a lower beta during the past five years.

Just to elaborate on the failure to deliver: the little book claims that if one selects from the small cap universe that in every single year it outperforms the S&P 500 and in addition there is no year it has negative returns. Given it has broken these two boundaries I am becoming more cautious. Aware obviously mr. Greenblatt claims you need to follow the approach for 3 to 5 years, which is why I'll still track the new selection.

[Edit] : selection was done on January 19th. 50 stocks selected from the screener, took the smallest (in market cap) 20 from that list. As you may have seen a few that were on the list last year are still there (e.g. VEC, PDLI, RPXC)

I did a similar experiment with real money a couple years ago. Something that is CRITICAL to what Greenbladt says is that the strategy only worked over a 5 year+ horizon. In fact he emphasizes that the reason it works even though the data is out there and the strategy is simple is because the wild swings drive people out and the "obvious badness" of the company keeps people away.

I stopped after 2 years because it was too stressful ... so I guess I'm in that category.

Another important part is to buy 4-5 stocks every quarter based on the changes in criteria.

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As others have posted, The S&P500 is the wrong index to compare to. You need a mid-cap or small cap index. Apples and oranges here. Midcap/Smallcap stocks tend to do very well early in the business cycle.

Given that my baseline alternative is to invest in the S&P 500 it is the right benchmark for me. I am not trying to outperform the mid-cap or small cap index. Greenblatt also uses the S&P 500 as his yardstick. Why bother with an active approach if it can't beat a passive rockbottom cost tracker?

Quote:

Originally Posted by MasterBlaster

And more importantly, you need to track the results over 15 years or so to make any statistically relevant conclusions about your method. Short term trends (one way or the other) could just be luck (good or bad) rather than method.

It is not my method, it is Greenblatts method that he tested over a longer period than that. I'm just applying it.

Given that his tests using his method claim outperformance vs. S&P 500 on a horizon of 3-5 years AND always outperformance (in any year he tested) if you select smaller stocks (out of a qualifying selection of 50) there is a clear difference between his claims and my results.

If predictions (claims) don't pan out, there is no need to keep testing it.

Given that my actual results differ from what he claims should be my results I'm not putting money on the line at this point. I will continue to follow and see if he gets vindicated. If so I'll probably resume and apologize to mr. Greenblatt. Although I'm sure he doesn't care too much

Two differences in application: I took the smallest 20 (by market cap) out of the top 50 selection. And I buy/sell them all at once vs. 5 a quarter. I do keep the shares for a bit over a year, just as he proposes.

The first difference he says in the book don't matter - you are still selecting from the "50 best" choices out there. The second difference he doesn't comment on. However, I do think that if that change (buy at once vs. quarter) causes such a drastic deviation that the method isn't robust enough to begin with.

I am aware of his 3-5 year claim, which is I why I'll keep tracking. If the approach makes a strong comeback I'll reassess.

I'm seeing too many question marks in my head now though to put real money in it. Won't regret if Greenblatt wins after all.

Given that my baseline alternative is to invest in the S&P 500 it is the right benchmark for me. I am not trying to outperform the mid-cap or small cap index. Greenblatt also uses the S&P 500 as his yardstick. Why bother with an active approach if it can't beat a passive rockbottom cost tracker?

Except, your method takes on way more risk than the S&P500. Smallcaps will (over the long term) outperform the S&P500 but what a wild ride you'll have. Troubled companies should also outperform the S&P500 provided they stay in business. Ditto on the wild ride though.

Anyone can "Bet the Farm" and sometimes come out ahead. But what takes real talent is to look at risk-normalized returns and come up with a superior method.

Quote:

It is not my method, it is Greenblatts method that he tested over a longer period than that. I'm just applying it.

It is Your method in that you (apparently) believe in it enough to put your hard earned money in it.

Quote:

Given that his tests using his method claim outperformance vs. S&P 500 on a horizon of 3-5 years AND always outperformance (in any year he tested) if you select smaller stocks (out of a qualifying selection of 50) there is a clear difference between his claims and my results.

Not sure we are talking in the same terms here. Are you familiar with Greenblatt and the book I am referencing?

I am familiar with the supposed premium and higher volatility of small caps as a class. The whole point of his approach however is to get lower volatility and certainly downside risk with a higher return, vs the S&P 500. So this wild ride is not supposed to happen.

Just as an illustration: none of his years employing this approach in small caps returned negative results, and only a few years were lagging the S&P 500 by a few percent.

I think to get the lower volatility, you need to have 30 or so at any time.

I thought maybe I'd model it in Motley Fool CAPS, but after I started, I realized that it would be almost as much work to do that as do it for real. But I did pick six stocks almost exactly 1.5 years ago (see image).

My plan was to buy 6 stocks every 2 months and sell all stocks when they reached a one-year holding period. Each buy was to be about $2800 so after a year (6 sets of 6), I'd be in for $100K.

If I had done it on 9/4/2014, I'd have had an annualized return of 16% (if I did that calculation right).

Price Then 9/4/2014

Shares

Invested

Price Now

Value

15.85

29

459.65

5.59

162.11

35.88

13

466.44

37.42

486.46

11.75

40

470

16.98

679.2

51.27

9

461.43

73.73

663.57

7.93

59

467.87

2.86

168.74

14.76

32

472.32

39.55

1265.6

2797.71

3425.68

There's a guy on there called "TrackJGreenblatt" that has 280 or so stocks picked over several years, but trying to analyze it threw my for a loop.

Oh, one more thing I found out. Vanguard looks like it might be the cheapest place to do this...$2 per trade. I checked some of the unlimited trade deals, but they had strings attached, fees, and stuff that made it not worth it. The first year I'd spend $72 and each continuing year I'd spend $144. Round trip on each stock takes me down to 12%, but I'll take that!

I ran "TrackJGreenblatt" data. The tool isn't a portfolio simulator, so only the buy and sell dates and prices are listed. I did the rest in a spreadsheet. Presuming $2 per trade, he turned 100 into 182 from 10/15/2007 until yesterday. The sheet comes out with a 9.1% XIRR.

I know it's not apples to apples, but the S&P turned 100 into 141 over that span (IRR of 4% or so).

I modeled that he put in 1/6th of the original stake every 2 months the first 12 months, so the first year he averaged only half-invested. I modeled he sold out everything yesterday.

Oh, and I didn't include dividends for the magic formula XIRR, only because it would have required too much lookup work.

The system on motley fool is a competition, and so doesn't allow for cheating. I was unable to find anyone else that did an experiment and quit, if that's what you mean by survivorship bias. The guy documented each selection when he made it...pulled 30 from the magic formula web site and used a random sort web site to select 5 or 6.

It went crazy down in 2008, but bounced back. Unfortunately I was unable to calculate continuous portfolio value, so no graph.

He documented his entire pull of 30 each time, so those could be used to generate another run, but the prices would have to be looked up, which would be a lot of clicks. If I can figure out how to automate that part, I might try it.

The system on motley fool is a competition, and so doesn't allow for cheating.

Everything I said about the "trackjgoldblatt" player on motley fool caps must be seriously discounted.

Although I don't think it's worthless, I did find an inconsistency that calls the whole thing into question.

In the "notes" section of each stock pick there was a paste from the randomized list of stocks from the magic formula site (see image). For each transaction day (6 transaction days per year), it picked the top 5 or 6 in the list (dropping ones that appeared before, but basically this much looks legit). The problem is that the buys that day did not always equal what was randomly picked. So it seems that the guy behind this tracking was putting his own spin on things.

I think the lists he posted were really picks from the magic formula site, but he didn't act only on the proper stocks.

Since companies like the ones getting picked go through buy-outs and go out of business, getting historical pricing on ALL of the picks is very difficult. If 100% of the picks had historical pricing, I could re-create a clean test, but the first one I tried "NOOF", and many more I tried, didn't have historical pricing.

I'm disappointed I can't test this thing myself using historical information, but alas, I must throw in the towel. If I get going on 'the real thing', I'll start a "newsletter".

I indeed meant with survivorship bias if he was the only guy there because others folded.

The drop in 2008 would be interesting to find out if he went down more than the S&P (-50% roughly from highs). If not that'll be a big plus (less volatility, better results).

I can tell you that with a real money account using his site and method for two years the volatility was higher and the returns were lower than the S&P. Might have been unusual. The s&p had good years back then .

From what I remember that's one of the reasons he says it will continue to work. People like me can't stomach how badly these companies seem to be doing.

Examples: Apollo education and ITT were picks when for profit education was tanking. Game spot when video games were moving to digital from retail. Coach when Michael Cors was killing them the buckle when retail was losing to Amazon.

Those companies all had excellent returns on investment over many prior years but at the time experienced large share drops, which is more or less what he does (good companies cheap). By buying 20-30 you get protection from a couple failures because many are temporary setbacks.

Still... itt and Apollo both lost over 70% in one year AFTER appearing on the screen. Gamestop was up 30-40%, then down if I recall.

It was a very wild ride and it was hard psychologically holding companies that the news is incredibly negative about. I suspect if I did it with fake money it would have been easier.

I couldn't do it... I really thought I could and this is from someone that has been buying the oil crash for the last year . I suspect it does work so wish you luck!

I couldn't do it... I really thought I could and this is from someone that has been buying the oil crash for the last year . I suspect it does work so wish you luck!

In running through the situation outlined in motley fool caps, I saw some jaw-dropping price crashes. I think it's just a waiting game for the occasional huge payoff.

By the way, I went back and removed the trackjgoldblatt trades that didn't appear to be supported by the random bi-monthly picks and it still came out to be 9.1% IRR. I kind of threw the baby out with the bath water when I saw the extra trades, but there were only a few of them. Some disturbance that I thought was bad, but wasn't was that some of the stocks were "re-picked", so there was no sale/purchase. I'm not sure if that's legit or not. Maybe once you gave a stock a chance, you should take it out of the running.

Hehe.
Yes, when I was doing my own experiment (2012 ish), I had STRA, QCOR and IQNT and they were big winners, but offset by the pain in mostly for profit education and retail. It's REALLY hard not to play the "but I KNOW that company X is actually bad" game which Greenbladt warns against. For example I'm "sure" that gamestop is dead because digital downloads is totally replacing retail game sales, so it's really hard to buy that stock in 2012... but if you look what happened it languished at 19-25 and then surged up to 50 because a new generation of consoles drove massive retail sales.

So what I "knew for sure" was completely wrong... and that is JG's dominant theory... that "historically well run businesses that fall out of favor and become cheap are, in aggregate, better investments than ones that aren't." It makes total intuitive sense... but wow... it's pain.

just to elaborate think that APOL was around 40 and showed up on the magic formula screen. cut in half over the next 2 years... and then cut in half again. ESI (ITT Tech) was around 30-40 and is now at 3. Weight Watchers was around 40-50 and was as low as 3...

those 70%-90% drops in value are far more painful than the 100-200% gains are happy .

Does Greenblatt's technique say to exclude from consideration issues currently owned? That would result in holding for longer than one year, so I think the answer there is "no". What about issues that were previously owned? Those probably would be fair game.

It's great that we can do these long term experiments and see what really happens. I'm doing a very simple one to see if a lump sum deposit in the Vanguard Balanced Index fund will beat an annuity. It will be interesting to compare it to this stock picking approach too.

This is probably the most interesting graph I was able to come-up with out of the trackjgoldblatt data. It's the cash balance after selling. The buying and selling happened roughly six times per year. Each "bucket" started with $16,667 (the six starting dots, buying about 6 stocks two months apart for a year) . From that same starting point, look at how radically each bucket balance diverged.

I thought I might look at this a little closer, now that I've got some spare time, and I found something kind of surprising. I might need to check-out that book again and see what Goldblatt has to say about this...

I pulled a random sample of 50 stocks from the magic formula site (specifying over 100M market cap) and they averaged 18B market cap. One was even over 500B. I found this surprising because I had been presuming that in order to get the financials to be in that set, those companies would have to be "too small for the mutual funds to bother with". Obviously not.

Next I pulled a random sample of 50 stocks contained in Vanguard Small-Cap Value ETF (VBR) and it averaged 2.2B with a maximum of 7.6B.

Are the days of the institutions ignoring small companies gone? Is this any different than it was in the past (like when the book was written and later updated)?

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